Coca-Cola East Japan Q3 & YTD 2015 Earnings Call

Transcription

1 Coca-Cola East Japan Earnings Call Calin Dragan, CEO Michael Coombs, CFO November 9, (Posted to CCEJ Website November 6, 2015)

2 Forward-Looking Statements The plans, performance forecasts, and strategies appearing in this material are based on the assumptions and judgment of the management of Coca-Cola East Japan Co. Ltd. (CCEJ) in view of data obtained as of the date this material was released. These forecasts may differ materially from actual performance due to risks and uncertain factors such as those listed below. Risks and uncertain factors are not limited to the items listed below. They are also included in our annual securities report, or Yuka Shoken Houkokusho. Intensification of price competition in the marketplace Change in economic trends surrounding our business Major fluctuations in capital markets Fluctuations in currency exchange rates, particularly with respect to the value of the Japanese yen and the U.S. dollar Increases in prices of raw materials Change in the tax environment CCEJ's ability to realize production efficiencies and to implement capital expenditures at the levels and times planned by management; CCEJ's ability to market and distribute effectively Uncertain factors other than those above The information in this presentation is provided for informational purposes and should not be construed as a solicitation of an investment in our securities. CCEJ undertakes no duty to update any statement in light of new information or future events. You should rely on your own independent examination of us before investing in any securities issued by our company. 2

3 Earnings Call Introduction Overview and Key Messages Incorporating Learnings and Progress to-date Third Quarter and Year-to-Date Results Share, Volume and Financial Results Outlook for Full-Year 2015 Revised Full-Year Plan Key Takeaways 3

4 Q3 and YTD Overview and Key Messages October 7 revision of full-year performance targets Growth in YTD volume, revenue and operating income, including the benefit of the Sendai Coca-Cola Bottling Company integration in the second quarter Improving gross margins, as we deliver manufacturing and procurement synergies Two quarters of negative market share partly due to pullback on promotional pricing in FC (future consumption) packages well as aggressive competitor activity (pricing, product launches) Transformation of our business continues Commissioned one new production line in Iwatsuki and a new bottle can filler in Tokai Stabilized initial operation of new Enterprise Resource Planning (ERP) system CokeOne+ after Q2 rollout Continued smooth integration of Sendai people, processes and systems into CCEJ 4

5 Full-Year Estimate Revision (announced October 7, 2015) Full-year reported operating income growth forecast revised to +13% (from +51%) Softness in vending channel persists due to channel mix shift since consumption tax rise. Poor summer weather in Kanto region also a factor. Continued strong competitive environment (pricing pressure, new product launches) Under-delivery of planned supply chain savings due to incremental logistics activity after ERP launch. Now expect approximately 2.8 billion yen in net supply chain and procurement savings in Task forces established to address priority areas Vending value proposition (pricing, cost structure) Supply chain synergies (fully leverage new production lines and further optimize logistics network) Cost to serve (complete review by channel to evolve RTM from phase 1- standardization, to phase 2- optimization) 5

6 Incorporating Learnings and Progress Actual results have differed from original assumptions, primarily in topline performance and industry competition and pricing trends. This masks real underlying progress: High efficiency of new lines and further production insourcing Pricing, terms & conditions (PTC) discipline Smooth integration of legal entities and Sendai Initial full deployment of standardized Route-to-Market (RTM) Evolving relationship/role sort with Coca-Cola system companies Improved data visibility & control for decision support through systems Now finalizing our 2016 business plan, incorporating learnings from last three years, underlying progress and current market situation, and will announce it when we release our full-year 2015 earnings. 6

7 Priority Issues Dedicated Task Forces Vending Situation Vending channel value proposition less appealing with consumers Majority of Commercial gross profit lag in 2015 due to vending Price gap with other channels Volume per machine declines and lower outdoor VM profitability What We are Doing Now Stop value decline by evaluating different price/pack combinations on a pilot basis, including vending exclusive Evaluating total cost base, from cost of machine to cost-to-serve Focus on growing indoor business and removing/moving unprofitable placements Synergies Situation Ongoing synergy capture offset by topline erosion and unplanned costs Delayed start to logistics synergy programs due to ERP turbulence Inefficient inventory movements Need better visibility of slowmoving inventory What We are Doing Now Remapping of complete logistics network opportunity for 2016 business plan Full utilization of new production capacity; no expected disruptions Focus on energy & utilities saving Leverage ERP to manage P&L accountability for better control of slow-moving inventory Cost Structure Situation Current Route-to-Market rollout focused on implementing a standard model of service (one size fits all) No major cost savings yet from ERP (optimize labor cost; eliminate unnecessary work) What We are Doing Now Complete review of cost-to-serve by channel and geography (i.e. high density vs. low density) From RTM phase 1 (standardize) to RTM phase 2 (optimize) Restructuring commercial organization to optimized service & cost model Indirect procurement at CCBSC 7

8 Results

9 Year-to-Date Volume Performance YTD Reported Volume by Quarter Q3 Reported Volume by Month +1.5% Q1 YTD volume +6.8% (-0.1%*) Q3 Highlights Changeable weather: A tale of two summers Continued soft results in vending channel +11% +11% -+1.3%* Q2 +9.0% --0.4%* Q3 Sendai Bottler acquisition effective April 1 +9% --1.2%* July Slow start, Less promo activity in SM & Discounters -+1.7%* +4.4%* August Hot weather in first half of month +7% --2.2%* September Cool, wet weather; Pricing discipline Competitor promotions, new product launch activities continue Weather data in Tokyo (vs. PY, Source: Metrological Agency) Ave. Temp. (Celsius) Precipitation (mm) Jul Aug Sep Q4 Outlook Solid start in October Market share recovering * Organic volume growth, not including Q2 acquisition of Sendai bottler 9

10 Share Loss amid Strong Competition 2015 vs. Prior Year Market Share* Q3 YTD Volume Value Volume Share vs. Prior Year Share gains in teas, sports and coffee Challenges in sparkling due to competitor launches and water due to pullback on 2L PET package 6 out of 8 quarters volume & value share growth Value Share vs. Prior Year * Including Sendai Bottler (now South Tohoku Region) Source: Intage, OTC channel, NARTD beverages 10

11 New Products & Retail Pricing Trends New Product Performance (YTD) Per SKU volume weaker than prior year Volume/SKU # of SKUs OTC Retail Price CCEJ average price declined vs. prior year, but our retail pricing is above market average, especially in large PET, where we have maintained price discipline CCEJ OTC Retail Price (As of October 18, 2015) vs. Prior Year (in Yen) Last 12 Weeks YTD Large PET ml PET CCEJ OTC Retail Price (As of October 18, 2015) vs. Market Average (in Yen) Last 12 Weeks YTD Large PET ml PET SKU: Stock Keeping Unit Source: Intage, OTC channel, NARTD beverages 11

12 Volume Performance by Channel Q3 Volume by Channel (% of total) Vending (VM) 27% Others 11% Eating & Drinking (E&D) 13% Total Volume, including Sendai Q2 +9.0%; YTD % CVS growth led by tea, water, coffee. Drug & Discounter, Supermarkets reflect less promotional pricing and pullback in 2L water Vending weak due to channel mix shift and weather. Eating & Drinking growth led by outlet expansion Channel Volume Growth Including Sendai Supermarket (SM) 23% Drug & Discounter (D&D) Convenience 12% Store (CVS) 14% vs. Prior Year CVS D&D Nat l SM Local SM VM Eat & Drink Q % +11% +8% +4% +7% +21% YTD % +8% +3% +3% +4% +17% Organic Volume Excluding Sendai Q3-0.4%; YTD -0.1% vs. Prior Year CVS D&D Nat l SM Local SM VM Eat & Drink Q even -1% -5% -2% -3% +13% YTD % -1% -7% -2% -4% +11% 12

13 Volume Performance by Category Q3 Volume by Category Sparkling (SSD) 26% Teas 21% (% of total) Others 11% Sports 14% Total Volume, including Sendai Q3 +9.0%; YTD % Juice 4% Coffee 14% Water 10% NST growth due to success of recent launches Water performance reflects less 2L promotions Coffee led by customer-exclusive brands SSD & Sports Drinks impacted by weather, vending Juice growth led by new outlet expansion vs. Prior Year NST Water Coffee Sparkling Sports Juice Q % even +17% +8% +7% +18% YTD % +4% +11% +4% +4% +13% * NST (Non-Sugar Tea) Organic Volume Excluding Sendai Q3-0.4%; YTD -0.1% Category Volume Growth Including Sendai vs. Prior Year NST Water Coffee SSD Sports Juice Q % -10% +4% -2% -3% +8% YTD % -3% +2% -3% -5% +6% 13

14 Financial Results

15 Drivers of Third Quarter Operating Income In MM JPY 7, Q3 Comparable Operating Income -1,708 GP Impact of Mix & Vol. -0.4% organic volume VM weakness & pricing pressure. Also negative mix from food service & customerexclusive brands Supply Chain Savings 1.6B yen manufacturing & procurement synergies, partially offset by logistics & distribution expenses DME** In line with plan VM locations Key accounts OPEX In line with plan Other Subsidiaries Sendai FV East Japan Depreciation vs. PY COGS: +10 SG&A: , Q3 Comparable Operating Income *Adjusted for 204 million in Q and -265 million in Q non-recurring expenses **DME: Direct Marketing Expenses 15

16 Third Quarter 2015 Results Improving gross margin driven by manufacturing and procurement efficiency SG&A increase led by continued marketing investment, logistics & distribution, depreciation, Sendai integration, etc. Tax rate increased by revisiting deferred tax accounting 2015 Q3 Actual in million yen 2015 Q3 One-time items 2015 Q3 Comparable 2014 Q3 Comparable Vs. PY Diff % Sales Volume (BAPC) (,000 cases) 90,783-90,783 83,313 7, Net Revenue 163, , ,106 11, COGS 87,946-87,946 83,373 4, Gross Profit 75,534-75,534 68,733 6, SG&A 69, ,456 60,923 8, Operating Income 6, ,078 7,810-1, Profit Before Tax 5, ,059 7,827-1, Net Income 3, ,377 4,899-1, BAPC (Bottler Actual Physical Cases) *Adjusted for 204 million in Q non-recurring expenses Note: 2014 volume was revised in our Q earnings announcement as a result of data and system standardization. 16

17 Drivers of YTD Operating Income In MM JPY GP Impact of Mix & Vol. Supply Chain Savings +3,224 6, YTD Comparable Operating Income -2, % organic volume VM weakness & pricing pressure. Also negative mix from food service & customerexclusive brands +2,870 5B yen manufacturing & procurement synergies, partially offset by logistics & distribution expenses -1,872 DME** In line with plan Big Bet brand launches VM locations Key accounts -609 OPEX In line with plan +1,224 Other Subsidiaries Smooth integration of Sendai FV East Japan Depreciation vs. PY COGS: +599 SG&A: +2,625 Cycling prior year accounting change in Q1 8, YTD Comparable Operating Income *Adjusted for 855 million in YTD 2014 and 1,030 million in YTD 2015 non-recurring expenses **DME: Direct Marketing Expenses 17

18 YTD 2015 Results Improving gross margin driven by manufacturing and procurement efficiency SG&A increase led by marketing investment, logistics, Sendai integration YTD taxes decreased due to additional deferred tax assets for integration of subsidiaries in Q YTD Actual in million yen 2015 YTD One-time items 2015 YTD Comparable 2014 YTD Comparable Vs. PY Diff % Sales Volume (BAPC) (,000 cases) 230, , , , Net Revenue 425, , , , COGS 227, , ,154 8, Gross Profit 197, , ,446 16, SG&A 189,843-1, , ,859 13, Operating Income 7,689 1,030 8,719 6,587 2, Profit Before Tax 5,903 2,733 8,636 6,790 1, Net Income 4,181 1,759 5,940 3,356 2, *Adjusted for 855 million in YTD 2014 non-recurring expenses Note: YTD 2014 results include JPY 805 million in COGS and JPY 3,850 million in SG&A due to the write-off of residual value of existing tangible fixed assets related to a change in accounting policy Note: 2014 volume was revised in our Q earnings announcement as a result of data and system standardization. 18

19 Outlook for Full-Year

20 Revised Full-Year Outlook (announced October 7, 2015) Sales Volume* (BAPC) (,000 cases) 2015 FY Revised Estimate in million yen 2015 FY One-time Items 2015 FY Revised Comparable Estimate 2014 FY Comparable Result Vs. PY Diff % 303, , ,586 22, % Net Revenue 562, , ,299 39,201 +7% Gross Profit 263, , ,336 24, % Operating Income 10,600 +1,337 11,937 10,474 1, % Profit Before Tax 8,300 +3,467 11,767 10,643 1, % Net Income 5,800 +2,505 8,305 5,975 2, % Note: 2014 volume was revised in our Q earnings announcement as a result of data and system standardization. 20

21 Drivers of Full-Year Revised OI Estimate In million JPY -2,543 +2,883-1,881 DME** -1,288 +1,595 +2,697 Depreciation vs. PY 10,474 GP Impact of Mix & Vol. Weakness in vending Negative mix from food service & customerexclusive brands Supply Chain Savings 6B yen manufacturing & procurement synergies partially offset by logistics & distribution expenses In line with previous plan OPEX IT costs up during transition year for CokeOne+ ERP Other Subsidiaries Smooth integration of Sendai FVEJ COGS: +634 SG&A: +2,063 Revised FY CAPEX now approx. 48B yen 11, FY Comparable Operating Income 2015 FY Revised Comparable Operating Income Estimate **DME: Direct Marketing Expenses 21

22 Fourth Quarter Key Marketing Initiatives Coca-Cola Bottle 100 th Anniversary Coca-Cola Winter Promotion Coca-Cola Lime Winter Song Bottles Coca-Cola Aluminum Contour Bottle Winter Design Georgia 40 th Anniversary / Vending Hot Drink Activation / ilohas Peach / Aquarius Cold Prevention Enjoy Warmer Coffee This Winter VM +2 C Up Campaign 22

23 Key Takeaways 2015 is a second full year of fundamental transformation Market situation has been tougher than we had anticipated (competition, lasting impact of consumption tax hike, etc.) We are taking urgent action with task forces to address specific priority areas Vending machine strategy and value proposition Continued synergy capture; focus moving from manufacturing to logistics Review of cost structure There is still much work to be done. We remain committed to transforming our business for growth 23

24 APPENDIX

25 CCEJ One+ Roadmap for Growth Forming & Storming Forming Define & deploy new business model Speed of integration: 250+ projects Identifying synergies & positioning for growth Norming Refine & optimize new business model Process re-engineering & launch of ERP system while delivering first results Performing Approaching global bottler performance levels Exploiting new architecture as competitive advantage to drive synergies & growth Tokyo Olympic Games & Beyond Accelerating Meet & exceed world-class bottler levels A world-class Japanese bottler on the world stage 25

26 The Coca-Cola System A powerful partnership driving growth of the Coca-Cola business The Coca-Cola system in Japan consists of the Coca-Cola (Japan) Company (CCJC), bottlers and other related companies. CCJC, as the franchise owner, is responsible for supplying concentrate and beverage bases (coffee beans, tea leaves, juices, etc.) for all of Coca-Cola s brands, as well as R&D, innovation, and marketing and brand development. The bottlers, including CCEJ, as franchisees, are responsible for manufacturing, distribution and selling the finished products. We all are working together with our system partners to grow the Coca-Cola business by optimizing our overall operations through more efficient production and distribution, marketplace execution that is firmly focused on the consumer, faster response to market preferences, enhanced customer service, and rigorous quality control. Other Coca-Cola System Related Companies in Japan Coca-Cola Tokyo Research & Development Co., Ltd. (CCTR&D) Coca-Cola IBS Co., Ltd. (CCIBS) Coca-Cola Business Sourcing Co., Ltd. (CCBSC) Coca-Cola Customer Marketing Company (CCCMC) Product development and technical support to respond to the needs of the customer in Japan. A wholly owned subsidiary of The Coca-Cola Company. Providing business consulting services, as well as developing and maintaining the information systems to support Coca-Cola System companies in Japan. Jointly owned by The Coca-Cola Company and all the bottlers in Japan. Providing joint procurement of raw materials, packaging, equipment, indirect material, etc., for Coca-Cola System companies in Japan. Jointly owned by The Coca-Cola Company and all the bottlers in Japan. Business negotiations window for nationwide retail, convenience stores, supermarket and food-service chains as well as developing proposals for sales promotions and storefront activities. Jointly owned by CCJC and all the bottlers in Japan. FV Corporation Co., Ltd. (FVC) Sales negotiations window for national chain vending operators, and deals non-coca-cola products as well as Coca-Cola branded products. Jointly owned by CCJC and all the bottlers in Japan. 26

27 Glossary of Frequently Used Terms Q3 Q2 & YTD 2015 CDE Coolers Abbreviation of Cold Drink Equipment. Vending machines, coolers and beverage dispensers, etc. The equipment with Coca-Cola s logos which keeps beverages at an appropriate temperature (chilled and/or hot) for immediate consumption, and ready for selling them at the storefront of retail outlets and restaurants. It serves as point-of sales advertising, too. DME Abbreviation of Direct Marketing Expenses. Sales promotion-related expenses reported in advertisement & sales promotion expenses and partly in sales commissions of SG&A. FC Abbreviation of Future Consumption. Purchase or sell beverage for future consumption in home, etc. It also means the products / SKUs for FC (for example, single packages 1L or more and multi-pack of IC packages) and channels that consumers purchase the beverages for FC. (for example, supermarket, drug & discounter channels, etc.). HORECA IC OBPPC Operational Excellence (OE) RTM Abbreviation of Hotel, Restaurants and Cafeteria. Generally means sales channels of these kinds. Abbreviation of Immediate Consumption. Purchase or sell beverage for consuming it immediately. It also means the products / SKUs for IC (for example, single packages less than 1L as well as fountains) and channels that consumers purchase the beverages for IC(for example, vending machine, convenience stores channels, etc.). Abbreviation of Occasion, Brand, Package, Price, Channel. A segmentation strategy tailored to consumption opportunities in five areas: occasion, brand, package, price and channel. The Coca-Cola System s way to develop people and culture around productivity which allows higher financial value achievement by driving sustainable improvement using common language and tools as well as focusing on business priorities. Abbreviation of Route-to-Market. A framework, a process, a philosophy, a proven approach for driving profitable growth. 27

28 THANK YOU Coca-Cola East Japan Q3 &YTD 2015 Earnings Call November 9, 2015 <Inquiries> Investor Relations Coca-Cola East Japan